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Corporate Sleuth Plans to Start Credit Rating Firm

Jules B. Kroll, who built a big business as an aggressive corporate sleuth, is planning to create a competitor for the now-tarnished credit agencies.

After selling his namesake security company five years ago, Mr. Kroll says he sees an opportunity to take many of the skills honed in corporate intelligence and use them to analyze the creditworthiness of companies.

Mr. Kroll said he was negotiating with several unidentified companies that already had the capabilities to analyze operational risk, portfolio risk and credit. And like many others, he is dismissive of the existing field.

“There is a lack of credibility in the rating agencies as a result of what happened in the mortgage crisis,” he said in an interview last week.

The big three credit agencies — Moody’s, Standard & Poor’s and Fitch Ratings — have been widely criticized for giving high ratings to various types of securities made from pools of mortgages, whose values have since tumbled. Under their business model, the agencies are paid by the issuers of the securities, raising questions about how objective their ratings are.

More investigation could have made a difference, Mr. Kroll asserts. For example, “Fitch did not know that 15 percent of the people that were the bases of the mortgages never even made their mortgage payments,” he noted. “We are going to do our own research.”

Mr. Kroll’s own record has been challenged in the last year after it was disclosed that the Kroll security company for many years staunchly defended the Stanford Financial Group, which authorities now say is at the center of a multibillion-dollar fraud.

Mr. Kroll, 68, founded his security company in 1972 after working as a lawyer and trying his hand as a corporate detective. His client list came to include the United States government, which hired him to find hidden assets of the Marcos regime in the Philippines. Five years ago, he sold the firm to Marsh & McLennan for $1.9 billion and pocketed about $100 million. He remained chairman until last year, and his agreement not to compete with the company expired last month.

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Jules B. Kroll, who sold his security company five years ago, is planning a new venture.

A well-known workaholic and entrepreneur in spirit, Mr. Kroll is planning the credit ratings company and a separate venture called K2 Global Partners, which will perform intelligence work for corporations and other clients. He is also working on a book about his career.

When asked about the Stanford problems, Mr. Kroll said that his former company averaged 15,000 investigations a year. “To me, the issue over a 37-year period is what do you think of the integrity of the firm,” he said.

Mr. Kroll’s company did work for Stanford for more than a decade, according to an article in the July issue of Vanity Fair. Earlier this year, R. Allen Stanford was charged with bilking investors out of $7 billion. He is awaiting trial. Stanford’s chief financial officer, James M. Davis, pleaded guilty this week and provided more details of the reported fraud, including a blood pact with a regulator, in his agreement with prosecutors.

Two Stanford investors, the National Electrical Contractors Association, a trade group, and its foundation, Electri International, have sued Kroll Inc., asserting that the firm had a conflict of interest. The two groups hired Kroll to perform due diligence on Stanford. They say they were not told that Kroll was also representing the company.

The lawsuits also say that the research prepared by Kroll on Stanford was inadequate. A spokeswoman for Kroll declined to comment on the lawsuits.

More problematic for Mr. Kroll than his Stanford connection may be the entrenched nature of the major credit agencies.

“I think it would take a consciousness shift among everyone” for business to move elsewhere, said Jerome Fons, former managing director of credit policy at Moody’s, “and it has to start with our government.”

Mr. Kroll said he planned to start by having investors pay a subscription fee for data and analysis. That business, he acknowledged, has far lower margins than working with issuers who want a rating on their securities.

Sylvain Raines, a former Moody’s analyst and co-founder of R&R Consulting, which helps investors gauge debt risk, conceded that there was a vacuum that many might try to fill. But he dismissed Mr. Kroll’s plans, saying that structured finance and capital markets required very deep knowledge.

A version of this article appears in print on , on page B2 of the New York edition with the headline: Corporate Sleuth Plans to Start Credit Rating Firm. Order Reprints|Today's Paper|Subscribe